115 CFA
File: Equity Investments - Reading 40 - 2. Approaches to Identifying Similar Companies

2. Approaches to Identifying Similar Companies

b. compare methods by which companies can be grouped, current industry classification systems, and classify a company, given a description of its activities and the classification system;

c. explain the factors that affect the sensitivity of a company to the business cycle and the uses and limitations of industry and company descriptors such as "growth," "defensive," and "cyclical";

d. explain how a company's industry classification can be used to identify a potential "peer group" for equity valuation;

What are the three main approaches to classifying and identifying similar companies?
1. Products and/or service supplied
2. Business-cycle sensitivities
3. Statistical similarities

What is a defensive (or stable) industry?
A defensive (or stable) industry demonstrates stable performance during both economic expansion and contraction.

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